Tuesday, October 6, 2009

Price Controls Decrease Wealth

Capitalism leads to wealth because capitalism is no more than the opportunity for people to discover mutually beneficial trades. In every transaction both the buyer and seller are made better off, and when people are given ample freedom they will negotiate prices and exchanges such that all mutually beneficial exchanges are made.

To demonstrate this feature in my class I give students demand and supply curves, allow them to buy and sell a hypothetical good, and assign them grades based on their profits. In two trading sessions I imposed price controls. One time I enacted a price floor and one time I enacted a price ceiling, and in both cases the overall level of wealth statistically and unambiguously declined.